Domino’s Pizza shares plunge 31pc after profit downgrade

The pizza group has scrapped its full-year guidance following a slowing of sales across its Asian store network.

Domino’s Pizza chief executive Don Meij. Picture: Tertius Pickard/NCA NewsWire

Domino’s Pizza boss Don Meij has admitted the company is paying the price for a poorly timed expansion in Japan and other parts of Asia but says it remains committed to the region and its prospects for growth in the long term.

Shares in Domino’s Pizza plunged on Thursday after the company scrapped its full-year guidance following a slowing of sales across its Asian store network.

In a gloomy late night trading update after market close on Wednesday, the company said its Australia and New Zealand branches had delivered their best sales performance in six years in the first half, but that was offset by an 8.9 per cent drop in same-store sales in Asian countries including Japan, Taiwan and Malaysia.

The trading update sent Domino’s shares tumbling on Thursday, closing 31 per cent lower at $39.51 — its lowest point since mid-August 2019.

Speaking to analysts on Thursday, Mr Meij said the Japanese market had been a difficult one to crack over the past two years, and while there was more uncertainty in the short-term, the company still had ambitions to double its store count in the country.

“Japan still isn’t trading at the performance that we would like, and we’re really disappointed with the results,” he said on an analyst call scheduled after Wednesday’s update.

“One of the realities of Japan is if we look at last year, we have seen that our category has shrunk in the last 12 months ... so we have been running against some headwinds. Is that going to roll with more structural headwinds in Japan? We don’t know that yet.

“With that aside, it’s a large market, it’s a large delivery market, and so when we have just over 1000 stores we can still access that and get great growth. We still need more time to build through the product.”

The ASX-listed Domino’s Pizza group has almost doubled the number of stores it, and its franchisees, operate in Japan over the past five years, to more than 1000, making the country the fourth largest market for the pizza brand behind the US, UK and India. Domino’s has an ambition to lift that number to 2000 stores by 2033.

Meanwhile, Mr Meij said “executional” failures in France and the widespread boycott of US brands by Malaysian consumers in the wake of the conflict in Gaza had weighed on the company’s performance in those two countries, offsetting the improvements in Australia and New Zealand.

He ruled out any further expansion into new territories in the short-term, blaming the company’s troubles, in part, to its rapid expansion across Europe and Asia in recent years.

“Hindsight is a wonderful thing, and one would argue that taking on more markets when we’ve stumbled in Japan, and we’ve still got a delay in France was poor timing,” he told analysts.

“I don’t think that they’re the wrong decisions for the long term but in the near term they’ve needed further management attention, and one would argue that it’s distracted against some of the core. I think that’s fair criticism in the near term - in the long term they’re markets that we should own.”

According to Wednesday’s trading update, preliminary net profit before tax for the first half is expected to land between $87m-$90m, down from $104.8m in the previous corresponding period.

In the update, Mr Meij said management had a “clear plan for growing sales and reducing costs, although progress in growing sales in some markets was slower than anticipated”.

“With improvements still required in H2 to grow order volumes, Domino’s advises any previous guidance for FY24 performance, de facto or otherwise, is no longer in effect,” the company warned.

At the company’s annual meeting in November, Domino’s suggested a strong second half performance and the company’s cost cutting measures would help to deliver an improvement in earnings for the full-year, following a 23 per cent fall in underlying earnings in 2022-23 to $201.7m.

The company has previously said savings from its restructuring efforts would improve earnings before interest and tax by $33m-$40m in 2023-24.

Domino’s was hit by broker downgrades on Thursday, with Jefferies cutting its rating to underperform, Citi cutting to neutral and Goldman Sachs reiterating its sell rating.

In a note to clients Goldman Sachs analyst Lisa Deng said the trading update meant operating earnings could decline in 2023-24, leaving minimal profit growth.

“This profit downgrade supports our thesis that Japan’s elevated competition post Covid is a more structural headwind,” she said.

“Our analysis showed that during Covid, Western QSR (quick-service restaurants) benefited from the large-scale closure of other food service restaurants (dine in, cafes, local QSR) and as the final Covid restrictions were lifted in May 2023, consumers returned to other food service choices, leaving Western QSR as a key laggard.”

Citi’s Sam Teager also said the downgrade appeared to be driven primarily by Japan where Domino’s operates about 38 per cent of its network through corporate-owned and operated stores, versus less than 10 per cent in Australia, New Zealand and Europe.

“While the new strategies to combat inflation appear to be working in some markets, other markets are proving more challenging, consistent with our recent preview, in which we flagged that sales would likely remain challenged in Asia and Europe, albeit they have come in worse than expected,” he said.

Domino’s will release its interim results on February 21.

Meanwhile, fast food brands owner Restaurant Brands reported an annual sales rise of 6.7 per cent to $NZ1.32bn ($A1.23bn) on Thursday, saying it expected to meet its full year profit guidance.

The owner of a large portfolio of KFC, Pizza Hut and Taco Bell stores across Australia, New Zealand, Hawaii and California said strong sales growth in the New Zealand market offset the slowing of sales growth in other regions, as cost of living pressures reduced discretionary spending.

Based on preliminary unaudited trading results, it expects to report a full-year net profit within the provided guidance range of $NZ12m to $NZ16m. That would be down sharply from the net profit of $NZ32.1m recorded for 2022.